Risk, Reputation, and the Price Support of Ipos

43 Pages Posted: 21 Jan 2004

See all articles by Katharina Lewellen

Katharina Lewellen

Dartmouth College - Tuck School of Business

Date Written: December 2003

Abstract

Immediately following public offerings, underwriters often repurchase shares of poorly performing IPOs in an apparent attempt to stabilize the price. Using proprietary Nasdaq data for a large sample of IPOs, I study the price effects and cross-sectional determinants of price support. Some of the key findings are: (1) Price stabilization is substantial, inducing significant price rigidity at and below the offer price. Stabilization appears, at least in the short run, to raise the equilibrium stock price. (2) Many studies suggest that stabilization helps to mitigate information asymmetry problems in the IPO market. I find no evidence that stocks with larger ex-ante information asymmetries are stabilized more strongly. (3) The characteristics of the lead underwriter emerge as the strongest determinants of price support. Larger and more reputable investment banks stabilize more, perhaps to protect their reputations with investors. But there are substantial differences in price support even among the largest underwriters (after controlling for IPO characteristics and underwriter size). (4) Investment banks with retail brokerage operations stabilize much more than other large investment banks. This puzzling result seems inconsistent with the common view that stabilization benefits primarily institutional investors, and I outline and examine several alternative explanations.

Keywords: IPOs, price support, stabilization, investment banks, reputation

JEL Classification: G24, G32

Suggested Citation

Lewellen, Katharina, Risk, Reputation, and the Price Support of Ipos (December 2003). MIT Sloan Working Paper No. 4453-03, Available at SSRN: https://ssrn.com/abstract=479925 or http://dx.doi.org/10.2139/ssrn.479925

Katharina Lewellen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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